Fitch Affirms Sprint Nextel's IDR at 'B+'; Outlook Stable

Fitch Affirms Sprint Nextel's IDR at 'B+'; Outlook Stable
Business Wire
CHICAGO -- July 11, 2013
Fitch Ratings has affirmed the Issuer Default Rating (IDR) and long-term debt
ratings of Sprint Nextel Corporation and its subsidiaries (together, Sprint).
In addition, Fitch has removed Sprint and its subsidiaries from Rating Watch
Positive, and assigned them a Stable Outlook. A full list of ratings follows
at the end of this release.
KEY RATING DRIVERS
The rating affirmation reflects Fitch's view that Sprint's current legal,
operational and strategic ties to Softbank do not warrant additional notching
support at this time based on Fitch's parent and subsidiary rating linkage
criteria. Thus Sprint's IDR is based on its stand-alone credit profile and
does not benefit from an uplift in ratings. The two companies do not share
legal or operational ties for common treasury or integrated operations.
Softbank's decision to divert $3 billion in cash from Sprint to shareholders
reflects a concern with Softbank demonstrating an appropriate level of
tangible support to Sprint's credit profile in order to link the ratings. A
greater indication of future financial support and strategic importance to
Sprint by Softbank would provide a linkage to the ratings and for notching
lift to Sprint's IDR.
Weak Financial Profile, Credit Metrics
Fitch expects Sprint's financial profile to remain weak through 2014 due to
the significant cash deficit during the next two years and the associated debt
borrowing that will increase leverage. Sprint estimated this deficit at
approximately $10 billion in its June 2013 proxy filing driven by $16 billion
in capital investment to keep pace with growing industry demand and the
competitive environment.
Fitch believes the cumulative $28 billion in capital spending the next four
years also reflects the underinvestment in Sprint's network and the need to
accelerate the deployment of capital to improve Sprint's competitive position.
Additionally, DISH's pursuit of Sprint and Clearwire had a negative impact on
Sprint's available liquidity for other strategic initiatives of $4.7 billion.
Looking forward, as Sprint leverages it cost reduction efforts, substantial
margin expansion should occur in the 2014 and 2015 timeframe. Cost reduction
efforts could drive up to $2 billion in savings. The improved cash generation
when coupled with reduced capital investment should allow for the company to
strengthen its financial profile, including the potential to generate free
cash flow by 2015. Leverage is expected to approach 5.5x by the end of 2013
before declining in 2014.
Operational Trends
Sprint also faces material execution risk across the numerous strategic
objectives that the company is pursuing. Fitch remains concerned with Sprint
platform gross additions trends that when adjusted for Nextel subscriber
recapture, declined in excess of 20% for the past four quarters. Consequently,
postpaid revenue growth declined to 0% year-over-year for the first quarter
2013 compared to a peak growth of 6% during late 2011 to mid-2012. During this
time, Sprint prioritized its marketing spend for the recapture of its iDEN
subscribers and Verizon Wireless took share by leveraging its 4G LTE
leadership position across its national footprint. As such, Sprint will need
to reinvigorate growth in light of this increased competitive activity.
The accelerated network investment to improve capacity, data bandwidth and
customer experience is a key strategic component of Sprint plans. The company
hopes the improved network when combined with its differentiated unlimited
plan and Softbank's expertise will increase its share of industry gross
additions. Fitch believes Verizon and AT&T Wireless are currently much better
positioned to leverage their scale, capital investment, subscriber bases and
spectrum portfolios to capture additional share and future growth,
particularly through the share data plans. These plans will likely result in
even stickier subscribers as consumers attach more devices, creating further
barriers to churn.
Consequently, Sprint's challenge is magnified, as industry postpaid and
prepaid additions are expected to contract further as the industry matures.
Additional avenues for incremental revenue growth include mobile
broadband/tablet devices and machine-to-machine opportunities.
Spectrum
Softbank's cash infusion materially strengthened Sprint's flexibility to
pursue key consolidation and spectrum opportunities. Fitch views Clearwire's
network and spectrum assets as integral to Sprint's long-term evolution (LTE)
plans to deploy high-band spectrum in high-capacity areas, particularly within
the urban cores under Sprint's control. This strengthens Sprint's long-term
competitive position and ability to offer a differentiated unlimited wireless
broadband plan versus its national peers.
Given Sprint's deep 2.5 GHz spectrum position and unbalanced spectrum
portfolio, Fitch believes Sprint could pursue opportunities to swap/sell 2.5
GHz spectrum and increase its holdings of other spectrum bands including the
sub 1 GHz band through the 600 MHz broadcast auction. This would enhance
Sprint's financial flexibility and allow for an expanded 2.5 GHz device
ecosystem.
Sprint and DISH could also find themselves at odds again as the FCC finalizes
its plan to auction the PCS H-block in late 2013, or more likely in 2014. This
spectrum is particularly attractive to each because it is adjacent to Sprint's
existing spectrum and strategic to DISH's AWS-4 spectrum holdings. An H-block
auction in the 2014 timeframe could increase Sprint's expected deficit if the
company participates in the auction.
Liquidity, Maturities & Financial Covenants
Sprint's liquidity position is supported by $7.8 billion of cash and $2.1
billion borrowing capacity under a revolving credit facility. Softbank will
contribute an additional $1.9 billion of cash at closing. Sprint closed a new
five-year $3 billion credit agreement earlier this year. As of March 31, 2013,
approximately $925 million in letters of credit were outstanding. Sprint also
maintains a second tranche of a $500 million vendor financing facility that
became available for borrowing on April 1, 2013.
Fitch expects Sprint will maintain at least $2 billion of cash going forward
to maintain adequate liquidity for its strategic plans. As such, given the
high cash requirements to fund the operating deficit related to the capital
investment, the Clearwire acquisition and potential spectrum auction, Fitch
expects Sprint will substantially increase debt during the next year.
Debt refinancing and redemptions have significantly reduced Sprint's maturity
profile (excluding Clearwire) from previous years. During the next four years,
$356 million, $292 million, $611 million and $2,111 million comes due,
respectively. Sprint will consider opportunities to refinance Clearwire's
high-coupon debt. Clearwire has $2.95 billion of 12% first-priority secured
notes due December 2015. The secured notes currently have optional redemption
rights at 106%. This will reduce to 103% in December 2013. The $500 million
12% second priority notes are due in 2017 with optional redemption rights
beginning December 2014 at 106%. The $300 million 14.75% first priority
secured notes mature in the fourth quarter of 2016 and contain a make-whole
premium, thus limiting refinancing options.
Financial covenants with the new credit facility have significant cushion
against the expected leverage increase with current total leverage ratio not
to exceed 6.25 through June 30, 2014. As of March 31, 2013, the leverage ratio
was 4.25.
The unsecured credit facilities at Sprint benefit from upstream unsecured
guarantees from all material subsidiaries. The credit agreement allows
carve-outs for indebtedness composed of unsecured guarantees that are
expressly subordinated to the credit facility. The unsecured junior guaranteed
debt is senior to the unsecured notes at Sprint Nextel and Sprint Capital
Corporation. The unsecured senior notes at these entities are not supported by
an upstream guarantee from the operating subsidiaries.
The $1 billion vendor financing facility is jointly and severally borrowed by
all of the Sprint subsidiaries that guarantee the Sprint credit facility,
Export Development Canada loan and junior guaranteed notes. The facility
additionally benefits from a parent guarantee and first priority lien on
certain network equipment. This places the vendor facility structurally ahead
of the unsecured notes.
SENSITIVITY/RATING DRIVERS
Positive: Future developments that may, individually or collectively, lead to
a positive rating action include:
--Execution on cost reduction opportunities leading to expansion in operating
EBITDA margins approaching 20%;
--Improvement in cash generation such that FCF prospects for the year are
approaching breakeven to positive;
--Improved FFO interest coverage approaching 4x;
--Improved FFO adjusted leverage approaching 4x;
--Improvement in postpaid churn by at least 10-20 basis points;
--Positive trends in gross addition share.
Negative: Future developments that may, individually or collectively, lead to
negative rating action include:
--Lack of an expected turn-around in FCF generation with persistent negative
trends;
--Aggressive spectrum purchases that would increase leverage over 5.5x on a
sustained basis;
--Postpaid subscriber trends materially weaken;
--Gross addition share gains fail to materialize;
--Additional material acquisitions.
Fitch affirms the ratings of Sprint Nextel and its subsidiaries as follows:
Sprint Nextel Corporation;
--IDR at 'B+';
--Junior guaranteed unsecured notes at 'BB/RR2';
--Senior unsecured notes at 'B+/RR4'.
Sprint Capital Corporation;
--IDR at 'B+';
--Senior unsecured notes at 'B+/RR4'.
Fitch has assigned the following rating:
Sprint Nextel Corporation;
--$3 billion senior unsecured credit facility 'BB/RR2'.
Fitch has withdrawn the following ratings.
Nextel Communications Inc. (Nextel);
--IDR 'B+.'
Sprint Nextel Corporation;
--$2.2 billion senior unsecured credit facility at 'BB/RR2'.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Parent and Subsidiary Rating Linkage' (Aug 8, 2012);
--'Rating Telecom Companies: Sector Credit Factors' (Aug. 9, 2012).
Applicable Criteria and Related Research:
Rating Telecom Companies
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=682323
Parent and Subsidiary Rating Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685552
Corporate Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684460
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=796099
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS.
PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK:
HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING
DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S
PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND
METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF
CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL,
COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM
THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER
PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS
OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN
EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER
ON THE FITCH WEBSITE.
Contact:
Fitch Ratings
Primary Analyst
Bill Densmore
Senior Director
+1-312-368-3125
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
or
Secondary Analyst
David Peterson
Senior Director
+1-312-368-3177
or
Committee Chairperson
Michael Weaver
Senior Director
+1-312-368-3156
or
Media Relations:
Brian Bertsch, New York, +1 212-908-0549
Email: brian.bertsch@fitchratings.com